Emergency savings, like the name suggests, are to ensure you have a sufficient amount of liquid savings as a buffer in case of emergencies. You define emergencies as unexpected occurrences which incur significant spending.
Examples of emergency fund usage:
- Loss of employment.
- Unexpected car accident/breakdown and repairs not covered by insurer.
- Hospitalisation bills (if possible, do get insured before this happens).
How much emergency savings do you need?
A rule of thumb is for six months to one year of emergency savings.
It also depends on your current situation and whether you have any dependants:
- No dependants: three to six months.
- Have dependants or sole income provider in family: six months to one year.
- Retired: 60 months (five years).
Consult your personal finance advisor for a more detailed planning.
Where should you keep your emergency savings?
• Your emergency savings need to be kept liquid and easily accessible in times of need. The focus is thus not on returns but on accessibility (and hopefully giving you some returns).
• First three months equivalent: savings or current account immediately accessible (consider a fixed deposit that you can immediately withdraw any time).
• Next three months equivalent: fixed deposit account. You can opt for a 12-month fixed deposit for a better rate if you are pretty sure you will not touch the funds unless it’s a real emergency.
• Amounts above six months equivalent: fixed deposit account. You can also consider placing the funds in your primary home loan, if applicable, and if rates are better than a fixed deposit.
This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.